The other thing that's very, very interesting in price sensitivity
is when there is a separation in time or method of payment.
So, in an earlier video, we spoke about the matching of supply and
demand and the example I gave you Uber, which is a car service where you can take
your mobile phone and you can order a car to come and pick you up.
And then the driver, let's say Chris, takes you wherever you want to go,
you get out of the car, no money changes hands.
Simply what happens is you get a text message or on the app you get the bill.
So in that case I don't really feel the pain of payment, the pain of payment.
If I had to take $20 out of my wallet every time I used Uber I might think about
walking a little bit more often or taking the subway.
But because the pain that is happening is just purely in my phone, and
I'm not feeling it directly, I'm becoming less price sensitive.
So that's another thing that makes price sensitivity lessened.
A couple of other things that are interesting here,
when there's a price/quality inference.
I become less price sensitive.
So if I needed to hire a lawyer for example, if I were in some kind of trouble
with the immigration service, do I want Amy's cheap lawyers $50 an hour or
do I want Chris's expertise lawyers $500 an hour.
In that case, with as an inference that the higher price leads to a higher quality
certainly for an important service, then my price sensitivity is again lessened.
So hopefully those four things give you a sense of how you can have the customer
psychologically feel a little bit less price sensitive.
Now of course, this begs the question of how would one measure price sensitivity.
Would you just do it intuitively, or would you try and do some research?
What I'm going to take you through now is,
there are really four ways to figure out price sensitivity.
I'm going to show on the screen a two by two matrix that explains
these four different ways.
You could measure people in their natural environment,
buying things or filling in surveys, that's the first column.
Or you could run an experiment, sort of an unnatural environment but
it's controlled either in the field or
the lab or you could engage in something called trade-off analysis.
Those are the two columns of this matrix.
And then on the rows, you could either measure actual purchase behavior or
you could measure their preferences and intentions.
So, here's an example of an experiment.
This was actually done by colleague of mine at the Wharton School, Steve Hoch,
who's a professor here.
And he wanted to try and understand the supermarket retailers whether or
not they could raise prices or lower prices.
So, what they did is that they cooperated with a institution in Chicago,
those of you who are in Chicago called Dominick's Finer Foods.
It's a supermarket chain located in the Chicago area, and
what they did was in some of the stores, all the prices were systematically
lowered by about 9% on a bunch of different products like detergents,
paper towels, canned tuna and so on.
In another group of stores, the prices were just kept as is.
And in a third group of stores
all of the prices on those same goods were Increased by 9%.
So that's a classic experiment where we have a control group, we manipulate
somethings downwards, somethings upwards and then we look at what happened.
And what they found was very, very, interesting.
They found that when prices were raised, demand went down by a little bit,
as you can see in the light grey there on the chart, but actually,
the drop in demand wasn't that much.
Customers hadn't really noticed this pretty small price change as
order of magnitude 9%.
So profits went up quite a bit.
So this experiment would indicate that those multi-product retailers,
could probably increase their price a little bit.
And you can probably think of some psychological reasons why that
works in a grocery environment.
Like it's not really efficient for me to pay attention to every single price and
try and remember it.
Now of course this study was done in the 1990s,
might be a different thing if they did it today in 2013, because again, I could take
out my friendly iPhone, and have my entire grocery list on here, I could use an app.
Like the SaveOn app or the SnipSnap coupon app.
And from those apps, I would be able to remember the prices or
at least my device will do it for me.
Second way that we can measure price, and this is a method that was really developed
by one of our former colleagues at the Wharton School, Professor Paul Green.
Paul is a very, very influential fellow in the area of marketing and he was one of
the founders of what's been known as conjoined analysis or trade off analysis.
So in the conjoined analysis, you present people different kinds of stimuli.
And what you do is you manipulate certain things.
So I give a personal example on this, when the four students who founded
former students, who founded the company Warby Parker, selling glasses and
eye wear on the internet, we did a project together here at the Wharton School
to try to understand gee, what the heck should we charge for these glasses?
What should be the price?
Now we knew of course we didn't want to price purely from the cost and
do cost plus pricing, we wanted to figure out from the top down,
the customer willingness to pay the ceiling.
So what we did is we presented different groups of people, glasses and
we manipulated just one feature of the glasses.
So Amy's group would see a pair of nice, blue Warby Parker glasses, and
the price will be $75 and then we ask Amy and
the other people in the survey how willing they would be to buy that product.
And in the second group, we'll say Chris' group, we would raise the price to $85 but
show the same pair of glasses and see what the response was.
And we did this for four prices, 75, 85, 95 and 105.
And through the conjoint analysis, we noticed the following.
Demand was highest at $75, it dropped at $85.
$85 to $95 was about the same.
And then once we went to $105, it was another drop.
So from this pretty rigorous statistical analysis, it was clear to us.
But among those four prices, $95 would be the right price.
This is something for those of you out there who want to do conjoined analysis.
There are many very good commercial providers and consulting firms who can
help you do this, and a lot of good publicly available information.
I'd encourage you to learn a little bit about conjoined analysis,
we don't have time to go into all the details here,
because it's also a method that's very useful for trying to value your brand.
As well as just set prices.